Sydney, 06 August 2015 – Sydney has emerged as the country’s standout office leasing market amid signs of a widening gap in the performance of Australia’s major CBDs.
The latest Property Council of Australia (PCA) vacancy statistics highlight that Sydney has the lowest vacancy of any of the capital markets at just 6.3%
CBRE Head of Research, Australia, Stephen McNabb said; “Stronger economic growth in the south east of Australia, particularly in New South Wales, is supporting growth in demand while the drag from falling levels of mining investment continued to adversely impact Western Australia and Queensland. Vacancy is heading to over 20% in Perth and Brisbane, is mid-range for Melbourne and below average in Sydney.”
Mr McNabb said Sydney was expected to maintain below average vacancy rates over the next two - three years, despite emerging supply.
“This is now supporting some rent growth in the Sydney CBD and a stabilisation in incentive levels. Demand is being driven by IT and the finance sector, with business conditions and top line revenue growth for these industries improving. Removal of office stock for residential conversion is also helping to keep the outlook for vacancy tighter by offsetting new supply coming to the market,” Mr McNabb said.
Melbourne’s vacancy rate remained above average at 8.1%, which, in contrast to Sydney, was keeping rent growth and the immediate outlook more subdued, Mr McNabb added.
CBRE Regional Director, Office Services, Andrew Tracey said market conditions for tenants had reached their peak on the eastern seaboard.
“Demand levels have improved significantly in the non-mining states. It appears the whistle has blown and the deals are not going to get any better for tenants in Sydney and Melbourne,” Mr Tracey said.
“The time for savvy tenants to deal is now if they want to lock in the best cost base for their businesses.”
Mr Tracey said increased supply would continue to be an issue however, for Perth and Brisbane, where the effects of the mining slowdown was still apparent.
“The story in the mining state states is a bit different. The value proposition is compelling - a business can upgrade quality but it’s a lower cost base, so the maths makes sense for more activity and that is what our teams are seeing in these markets.”
CITY COMMENTARY
Sydney CBD - Jenine Cranston, Senior Director, Office Services
Demand for office space in the Sydney CBD is tracking well, but the significant change in the level of tenant engagement and deal flow is the most encouraging factor at present.
Improving conditions in the NSW economy are filtering through to the office market, with transaction volumes up 25% year to date compared with the previous corresponding period. This uplift can be largely attributed to strengthening demand from small to medium businesses.
The strength of the IT sector has dropped off slightly compared with previous years, with resurgence in enquiry from the financial services and professional services industry.
While enquiry levels and demand remains at positive levels, there are still close 200 options available to users in the 800sqm – 2,500sqm range, meaning there is likely to be little change in deal terms in the short term.
Sydney North Shore - Peter Flint, NSW Head of Office Services
North Sydney continues to be the star performer of Sydney’s metropolitan market, continuing its steady upwards trajectory with a number of significant A-grade transactions highlighting the market’s strength.
North Sydney has emerged Australia’s best performing market for the past five years. Significant transactions include the Gartner Group deal at 40 Mount Street – North Sydney’s newest building until 177 Pacific completes next year – which set a new benchmark rent at $750 per square metre net. This deal alone represents a rental increase of 48% over five years at 40 Mount Street, exceeding 8% per annum compounded.
Work continues apace at 177 Pacific Highway at what will be the largest office tower on the lower north shore, with significant tenant interest focused on the large (1,560sqm) floor plates.
The recent decision by RMS to vacate up to 14,000sqm in North Sydney’s only premium grade building at 101 Miller Street provides a rare opportunity for tenants, with it being only the second time in 23 years that such a large amount of space has been offered in the building.
Parramatta - Stephen Panagiotopoulos – Director, Commercial Sales and Leasing
Parramatta continues to hold the title of the tightest office market in Australia, with significant stock declines continuing in tandem with strong rental growth and steady incentive levels.
Stock under development, and accompanied time delays, are starting to have an even further effect on the office market in the medium term. Despite whole market vacancy remaining in the 7.4% range, over circa 6,000sqm of un-accounted transactions have recently completed, including the local government’s relocation (5,500sqm) from its Darcy Street building, which is being demolished to make way for stages five and six of Parramatta Square.
Residential conversions are also placing further pressure on the office market, as tenants look to relocate amid redevelopment projects in the area.
CBRE forecasts vacancy rates will continue to decrease below 6% until 2019, when stages five and six of Parramatta Square are earmarked for completion.
In the short-term, CBRE expects continued strong face rental growth and further firming of current incentive levels. Due to stock limitations, some landlords may look to refurbish buildings to higher standards in order to capitalise on strong rents and falling incentive levels.
Brisbane - John Walklate, State Director, Office Services
Off the back of forecast employment growth in Brisbane, conditions are expected to improve in the CBD office market, with absorption tipped to modestly increase over the current calendar year.
As Queensland’s economy adapts to the mining downturn, demand for office space is now originating from a broad base of industries including business and professional services, education, recruitment and agriculture.
At street level, there is increasing enquiry from tenants looking to take advantage of securing upgraded premises via attractive and compelling leasing terms. While this is stimulating leasing activity across the market, cost and efficiency remains a key focus for occupiers.
The majority of activity is centred in the prime and A-grade markets, with the secondary market continuing to face significant challenges.
The positive bias towards prime stock is expected to remain, with secondary vacancy continuing to top 20% over the five-year forecast period. The total amount of sublease space available in the market has tightened following on from solid levels of sub leasing activity in the second half of 2014.
Gold Coast - Nick Selbie, Associate Director, Office Services
Vacancy continues to gradually decrease on the Gold Coast through a combination of limited new supply and returning business confidence.
Challenges still exist at the top and bottom of the market grades with a significant portion of vacancy residing in A-grade unfitted stock and C/D grade older stock which have been relatively dormant for a number of years now.
The stronger portions of the market are not surprisingly the B-grade and well fitted A-grade options, where available incentives can be applied to flight to quality tenants and their entry into the higher quality stock.
Although enquiry is only steady at best, active parties are increasingly transacting and doing so across most size ranges up to 1,500sqm. However, 100-250sqm remains the dominant market sector.
New businesses are entering the market and many existing are committing to expansion space with the majority of leasing activity led by construction and associated groups off the back of the residential and development upswing closely followed by the financial sector and its providers.
Again, with no new major supply additions on the horizon a continued natural decrease in vacancy is forecast for the short to medium term with rents and incentive to remain steady for this period.
Melbourne CBD/Docklands – Marc Mengoni, Director, Office Services
Melbourne has seen a solid number of transactions across all size ranges since January 2015, which, when coupled with the completion of 570 Bourke Street and 567 Collins Street this quarter, should hopefully see the CBD vacancy remain steady.
Major suburban occupiers are continuing to consolidate operations into CBD premises. Examples of this include Vitrol (formerly Shell) taking 4,200sqm, Porter Davis 2,825sqm and NEC securing 5,636sqm - all of which relocated to 720 Bourke Street. Additionally, VECCI has taken 2,795sqm at 150 Collins Street. Education and IT services also continue to be a good news story for Melbourne adding diversity to the active tenant mix.
Across the market, major institutions have drawn the line in the sand with regards to incentives and it is positive to see that this has not hampered tenants across the board proceeding with securing new premises.
Occupiers are actively engaged in negotiations and the overall mood of the market is significantly more positive than 12 months ago.
Perth - Andrew Denny, Senior Director, Office Services
While Perth’s CBD office market continues to see subdued activity for owners, conditions are currently at their best for tenants to relocate. Over the first half of 2015, there has been an uplift in leasing activity as tenants take advantage of the lower rents and attractive incentives available.
There is increasing evidence of a flight to quality, with most transactions occurring in the prime section of the market, as demonstrated by the recent Wesfarmers move to Brookfield Place. Tenants are now realising they can afford the best quality buildings, which are being offered on attractive terms. This sentiment is expected to attract some major new tenants into the market over the next 12 months.
There has been a spike in enquiry levels from suburban-based tenants, including those in West Perth, where there is a limited supply of high quality stock.
The CBD will see increasing withdrawals of lower grade stock for conversion, primarily for residential use. Examples of this include the former HBF buildings in Murray Street, and former Synergy building on Adelaide Terrace.
Adelaide - Andrew Bahr, Director, Office Services
The divide between higher quality stock and unrefurbished secondary buildings endures as tenants continue to demand the best quality space. New foyers, refurbished amenities and end of trip facilities continue to dominate tenants “hot topics” and recent transactions indicate that they are willing to pay higher rentals to secure space in buildings that tick these boxes.
Stock obsolescence is becoming a significant concern in a market that doesn’t have a residential or hotel conversion market like the eastern seaboard and is a major factor driving vacancy rates.
At the upper end of the market, availability for the best quality space is tightening and is outperforming the bottom of the secondary market by significant margins.
Canberra – Belinda Hedley, Senior Negotiator, Office Services
The Canberra office market remains subdued, with deals taking extended periods of time to convert as tenants allow longer lead times to assess options. The majority of enquiries have tended to be concentrated in the sub 500sqm range, with a preference for city locations.
Tenants are seeking out value for money and quality fitted out accommodation in A and B grade buildings, inevitably reducing available stock in these grades and increasing stock in the lower secondary sector. Landlords are being creative with their solutions to attract tenants to their buildings. For example, ISPT introduced Dialogue, an in-house business and conference centre, which also offers serviced office accommodation and catering facilities. Tenants are utilising services such as these and seem to be abolishing the need for boardroom facilities within tenancies.
There are still some large enquiries in the market with accommodation decisions yet to be determined. There will be activity as relocations and consolidations are decided. There are many rumoured impending moves by government agencies into new accommodation together with government sub lease space being back filled through operation “Tetris”. In addition, the market is still awaiting the outcome of the Australian Border Force, Department of Finance, Department of Communications and ACT Government requirements, which will have an impact on the market going forward.
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